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Summary: This report provides information on the systems used to process financial transactions between buyers and sellers of goods, services, and financial assets. These systems--known as payments, clearance, and settlement systems--are vital to the smooth functioning of the U.S. economy and the free flow of economic activity worldwide. They allow ownership of products, funds, securities, futures contracts, and other financial instruments to be exchanged and settled among consumers, financial institutions, and businesses. They also play a critical role in stabilizing financial markets and reducing systemic risk. GAO describes the (1) various payments, clearance, and settlement systems used in the United States; (2) various emerging products and services, referred to as "electronic commerce;" (3) risks associated with these systems, products, and services, and discusses how those risks are mitigated; and (4) significant issues relating to the systems, products, and services that face users, regulators, and policymakers.
GAO noted that: (1) the United States has a wide variety of payments, clearance, and settlement systems; (2) some systems are used primarily for large-dollar payments, such as Fedwire and the Clearing House Interbank Payment System (CHIPS), others are used for the clearance and settlement of financial products, such as securities, futures, and options; (3) these systems are mainly used by major financial players, such as banks and other corporations, and are generally referred to as wholesale systems; (4) other systems are used for the smaller dollar transactions with which most consumers are familiar, e.g., checks, credit cards, and automated clearing house payments; (5) generally, these smaller dollar systems are referred to as retail systems; (6) new, consumer-oriented products, such as stored-value cards, are now being introduced; (7) a stored-value card is a credit-card-sized device with an implanted computer chip, that has a certain value and can be used for a variety of applications including financial transactions; (8) new services, such as electronic money, are also being tested and marketed; (9) electronic money is funds held in an online account that can be transferred over the Internet between any two parties, including consumer to consumer; (10) these new products and services have not yet gained wide acceptance, but many private sector companies are planning for the rapid expansion of these and similar products in the future; (11) many significant issues have been raised by industry officials, regulators, and others regarding the operations, use, and regulation of payments, clearance, and settlement systems; (12) for large-dollar transactions, some have raised the issue of the appropriateness of some institutions using less secure payment systems to reduce their costs of transfers; (13) others have raised issues about new and emerging products, such as stored-value cards and home banking; (14) also, many have raised questions about the appropriate regulatory structure for these products and services; (15) security issues for both wholesale systems, such as Fedwire and CHIPS, and emerging services, such as home banking, have also been raised; (16) the enormous volume and rapid growth in foreign exchange transactions have led to discussion and studies of how to better reduce risk in this market; and (17) finally, many private industry officials, especially private payment system providers, have raised issues for some time about the ability of the Federal Reserve to be both a regulator of payment systems and a fair competitor in delivering these payment services.
